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Real Estate, Interrupted

No industry is immune from technological disruption real estate is no exception. Amidst the rise of PropTech, blockchain technology is rapidly being adopted into the real estate sector in various forms.

The technology has been touted to have the potential to improve the efficiency of some of the processes involved in real estate transactions, from listing, through to sales and beyond. But whether blockchain in real estate is overhyped is yet to be seen.

A report by Deloitte claims that the inefficient system that currently dominates the industry is ripe for disruption. The report argues that there is no central database that dominates the market for real estate listings which keeps all the information in one place, and there are also instances of the information made available in existing databases being inconsistent across listing services. Deloitte also makes the point that there is little trust between parties, and that the current process of due diligence leaves room for improvement.

Despite such claims that blockchain is set to disrupt real estate the same way that technology has disrupted other industries, such as Uber and Airbnb, there hasn’t been much evidence from the market to indicate that these predictions are coming true. Of course, there are plenty of tech start-ups boasting new technology and promising to re-invent the real estate market. But as most start-ups are bought and absorbed by firms, it’s less likely that this technology will lead to market disruptors replacing current industry leaders, and instead the technology will simply update the processes currently employed.

Nowhere is this more contentious than in the context of smart contracts. The term ‘smart contracts’ has been bouncing around in the tech and business world for nearly two decades and has reached new popularity in the wake of blockchain, but even before Ethereum became mainstream the term was quite popular. Since blockchain has become well known, Smart Contracts have reached new heights of hype.

Researchers have identified the potential for blockchain technology to be implemented in the development of Smart Contracts. Because blockchain acts as a public ledger, recorded by all users in the chain and resistant to tampering, it can facilitate the forming and signing of contracts. A Smart Contract involves defining clear parameters that must be met for a function to move to the next step. Once the prerequisite conditions are met, the information will enter the chain and prompt the contract to move to the next step, automatically alerting all other parties privy to the chain. This also has a place in the rental market as security deposits can be controlled by the contract and can be easily returned to the lessee. If needed, cryptocurrencies could be used to facilitate this step.

Despite the praise for these innovative smart contracts, there are growing doubts regarding the relevance of this technology in real estate. While simple contracts might be able to be automated without issue, there are instances in real estate where human decision making is needed for judgement calls. A similar argument explains why lawyers are still in demand even though many of their roles have been automated, and in some instances the AI is proving to be faster and more accurate.

Tamper-proof documents do little to confirm the accuracy of the contents, and there’s also the question of ensuring that the conditions have actually been met; it is doubtful any company would accept that the conditions of a multi-million dollar contract had been met without human confirmation. And if the conditions haven’t been met, someone will still have to call the lawyers. Of course, these contracts have to be created by someone and despite progress in this regard, it is still much more simple and achievable to write an analogue contract.

While smart contracts will have their place in the business world, they might be better applied to simple sales which do not require complicated decision making. So far, their application is limited, and although this technology may speed up some processes, it is revolutionize the market.

Regardless of whether blockchain will substitute existing industry leaders or instead just compliment it, there are several other potential applications for this technology in real estate:

Listings

Currently, listings are spread across multiple third-party platforms and information sharing between these platforms isn’t efficient, meaning buyers are relying inaccurate, incomplete and outdated information. This complicates the search process. A peer-to-peer decentralized digital database using blockchain technology could mitigate these inefficiencies. New blockchain listing services such as Imbrex are offering an alternative to other listing services like Zillow. Based on blockchain, these services take more of a hands-off approach to the process and besides offering a platform for agents, sellers, and buyers to interact and do not influence or interfere with the data that is provided. They also do not charge a listing fee and instead encourage agents to list properties by offering their own cryptocurrency in exchange. These new listings services further differentiate themselves by boasting a more global network, compared to the current market leaders which only focus on one geographic segment.

Sharing documents

There are countless claims that blockchain technology will simplify the process of sharing documents. Not only does blockchain ensure the documents can’t be tampered with once they’re signed and returned, it also streamlines the bureaucratic side of sales by allowing documents to be safely shared and signed digitally. This is particularly relevant for facilitating sales across borders and will allow foreign investors to acquire property overseas more easily, with fewer appointments between parties needed.

Record-keeping

According to a research article published by MIT (Spielman 2016), blockchain is a viable technology for improving the land registry process. The report said that up to one third of titles in the US have errors that need correcting, and the blockchain process would reduce these errors. Implementation of this technology would allow the industry to move away from the current status quo which still often relies on physical paper copies of titles.

Due diligence

By using blockchain-secured digital identities, the verification process could be optimized by reducing the need for face-to-face meetings between buyers, sellers and agents. Sharing documents can be done securely using the ledger with no risk of tampering and can greatly improve the current process which features back-and-forth information sharing which is time-consuming and particularly difficult across international borders.

Investing

Blockchain allows the tokenization of property and allows investors to buy small shares of property. This makes investment more accessible to people with less capital, such as younger people. Tokenization means breaking property ownership down into shares which cannot be tampered with, in a way that is resistant to fraud. BitofProperty is one such company, based in Singapore, and lets people earn a passive income through acquiring small, controlled shares of property – in exchange for a 10% fee.

Lending

Besides the sales process, blockchain is also changing the way people borrow money for purchases and investment. Some new-era listing services offer financing via blockchain such as REX. But the next era of tech will involve alternative lending services, moving away from traditional banks. Also, peer-to-peer lending will increase access to credit, and companies like The Leading Coin and Trust Circle are leading this movement.

Sources

  • Collab between Microsoft and Centaline (https://www.ledgerinsights.com/microsoft-centaline-blockchain-real-estate/)
  • Deloitte report (https://www2.deloitte.com/us/en/pages/financial-services/articles/blockchain-in-commercial-real-estate.html)
  • Emerging real estate blockchain companies (https://builtin.com/blockchain/blockchain-real-estate-companies)
  • Spielman 2016 (https://dspace.mit.edu/bitstream/handle/1721.1/106753/969450770-MIT.pdf?sequence=1&isAllowed=y)
  • Karamitsos et al (https://www.scirp.org/journal/PaperInformation.aspx?paperID=85741)
  • CB Insights (https://www.cbinsights.com/research/blockchain-real-estate-disruption/)
  • Deloitte Report (https://www2.deloitte.com/mt/en/pages/thought-leadership/mt-tl1705-blockchain-enabling-the-democritisation-of-real-estate-property-listings.html)
  • Dummy’s guide (https://blockgeeks.com/guides/smart-contracts/)


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